The Hindu Business Line : Keeping `mom-and-pop' in business

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Keeping `mom-and-pop' in business

Shanthi Venkataraman

AFTER much debate and eager anticipation, the Centre has finally allowed foreign investment of up to 51 per cent in "single-brand" retailing. Foreign retailers can now also open cash-and-carry wholesale outlets in India without prior Government approval as FDI has been allowed under the automatic route.

Even as the Left continues to protest the move, the UPA insists that the policy has tried to shield the "mom-and-pop" stores, which account for 97 per cent of the domestic retail market, from the onslaught of foreign competition. Details regarding sourcing requirements, investment stipulations and other riders are, however, yet to be outlined.

Single brand: Whatdoes it mean?

The Government has also left most people guessing on what it means by insisting that all products must be retailed under a "single brand", the term lending itself to several interpretations. Industry sources believe the country will attract mainly retailers of luxury brands, many of whom already have a presence in India, by way of franchising agreements. Brands such as Omega, Tag Heuer or Tommy Hilfiger do not compete for the customers of a Titan or a Color Plus, let alone the kirana store. Allowing them to expand their presence would not displace labour in the unorganised segment, which has been the biggest argument against retail FDI.

But nothing prevents a foreign retailer from launching a brand that would cater to the mid-priced segment, posing a threat to domestic retailers — both modern and unorganised. Selling a mid-priced brand here would, however, mean higher sourcing from India, as import tariffs are stiff and would benefit middle-class consumers. Much would depend upon what sourcing requirements, if any, are stipulated.

Also, single brand retail could mean that retailers who have multiple brands would have to open separate retail chains for each brand and would also have to apply for approval for each chain. This could bring in higher investment from those who are serious about the Indian market.

At the same time, Wal-Mart or Tesco, could, technically, retail a broad range of products under private labels. Their interest in the Indian market, however, lies mainly in the food and grocery segment, where retailing of popular FMCG brands is inevitable if the proposition is to be viable.

The Government's intentions in terms of attracting foreign investment and protecting domestic interests will become clearer over the next couple of weeks. Investors could, however, watch out for the following developments over the next year or two.

More players to enter

The move to allow FDI up to 51 per cent, as against 26 or 49 per cent, has made the sector more attractive to foreign retailers, as they would be entitled to a controlling stake. Retailers who are comfortable with ownership rather than franchises may look at the Indian market with greater interest. More players could enter the cash-and-carry format, where they would have a 100-per cent stake; Wal-Mart may bring its cash-and-carry format, Sam's Club, to India. It would, however, have to restrict sales to only businesses, something that has proved difficult for German retailer, Metro.

The latter has come in for a lot of flak from domestic retailers in the country, who claim that goods are being purchased by members for private consumption. Foreign retailers may, nonetheless, be tempted to enter the market in this format now and hope for a relaxation in the rules to enable them to cater to the end-consumer as well.

Opportunities for JVs

Investors could look forward to more joint ventures, and this will not be restricted to the retailing companies alone. In recent years, players such as Arvind Brands and Madura Garments have struck up marketing alliances with international brands such as Tommy Hilfiger and Esprit.

Planet Sports holds the franchise rights for several international brands. As there is a 51 per cent-cap, such marketing alliances and franchise agreements are likely to be undisturbed for now. Instead, there is scope for these agreements to be converted into joint ventures with the foreign partner holding a 51 per-cent stake.Joint venture opportunities could also open up for players such as Pantaloon, Trent and Shoppers' Stop, not to mention Reliance's proposed retail venture.

Possible revision in FII regulations

With a change on the FDI stance, a new ruling on investments by foreign institutional investors (FIIs) may not be far behind. FIIs are currently not allowed to participate in the primary market, while their aggregate holding in a listed stock cannot exceed 24 per cent.

Allowing FIIs to invest in unlisted stocks could provide more funding options to domestic retailers, many of whom encounter financing problems when scaling up. This might also lead to more companies tapping the primary market. The FII limit in listed stocks could also be raised, providing space for gains. At this early stage, there may not be any significant impact on the valuations of retail stocks. The decision to allow FDI in retail is, however, bound to bring about changes in the retail environment and domestic retailers would have to adapt their practices accordingly.

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